BLUEPRINT: Québec takes on the world

Bill Tresham may oversee global real estate investments at Ivanhoé Cambridge, but don’t tell him that he invests in properties. “People like to say, ‘You have a [property] portfolio’,” says Tresham, speaking with PERE in the sunny 29th-floor conference room of 1411 Broadway in midtown Manhattan. “Well, we don’t really. We have several businesses in which we are heavily invested.”
Like the Ontario Teachers’ Pension Plan Board’s Cadillac Fairview and the Ontario Municipal Employees Retirement System’s (OMERS) Oxford Properties, Ivanhoé Cambridge operates as the standalone real estate company of a Canadian pension plan – Montréal-based La Caisse de dépôt et placement du Québec, which manages the pension plan assets of workers in the Canadian province of Québec.  The company held C$40 billion ($36.82 billion; €26.89 billion) in real estate assets as of December 31, consisting primarily of shopping centers, office buildings and multifamily properties in Canada, the US, Europe, Brazil and Asia.
With C$200 billion in assets, La Caisse is the second largest pension plan in Canada after the Canada Pension Plan Investment Board (CPPIB). The institution ranked ninth on PERE’s most-recent Global Investor 30 list with $22.73 billion of equity – approximately 11 percent of the pension’s total net assets – invested in real estate, two spots below CPPIB, which had $24.52 billion. Meanwhile, it was several places above Ontario Teachers, with $16.42 billion; British Columbia Investment Management, with $15.32 billion; and OMERS, with $14.93 billion.
Like its fellow Canadian pensions, La Caisse is a proponent of the so-called Canadian model of investing, which pursues direct investments in both real estate companies and real estate assets, typically through joint ventures with local operating partners. Few other pension plans, however, have as singular of a focus as Ivanhoé Cambridge in structuring all of its real estate investments as part of businesses specified by geography and property type rather than one-off transactions scattered across strategies and markets. 
“We understand the notion that buying a building, building a building and investing in a building is a good thing,” says Tresham. “But building a business and investing in a business, where you can buy and sell buildings within that business, is a better thing. So, as we move beyond our own borders, we’re constantly trying to find ways in which we can participate in business building as opposed to portfolio building.”
1411 Broadway is itself an example of business building, as it is the first investment that Ivanhoé Cambridge made through a joint venture with Chicago-based real estate investment firm Callahan Capital Partners in 2012. The partnership, which is intended to build Ivanhoé Cambridge’s office platform in the US, has since purchased a 100 percent ownership stake in 10 and 120 South Riverside Plaza, twin office buildings in the West Loop submarket of Chicago’s central business district, for more than $360 million; and a 51 percent interest in Manhattan’s 1211 Avenue of the Americas for more than $850 million. Both deals closed in the fall of 2013.
A new, post-crisis view
Ivanhoé Cambridge began reorienting its business from a portfolio of assets to a portfolio of businesses three years ago, when it was re-emerging from the aftermath of the global financial crisis. “Ivanhoé Cambridge has two histories,” says Tresham. “It has a history up until 2008, and it has a history that started in 2011. In the meantime, it was holding on for dear life.” 
In 2008, La Caisse saw its net assets under management plunge from C$155 billion at the beginning of the year to C$120 million by year’s end. “While La Caisse was really struggling after this major loss, there wasn’t much of an outreach to find opportunities,” Tresham says. “So, during the period of 2008 to 2009, when buying was the best, we essentially were inactive.” 
Prior to the shift in Ivanhoé Cambridge’s investment strategy, cash-strapped La Caisse was calling on the company to sell assets and repatriate the capital. The subsidiary, however, resisted for the most part because selling during the depths of the global financial crisis would have been detrimental to the business over the long term.
Tresham, who had been serving as president and chief executive officer of another La Caisse real estate subsidiary, SITQ, since September 2010, took over as president of global investments at Ivanhoé Cambridge in July 2011. Together with Daniel Fournier, the newly appointed chairman and chief executive, he proceeded to rebuild the company.
“We didn’t have to look any further than our own company to see what worked and what didn’t work,” Tresham says. With its single-asset real estate investments made with different partners in different countries, the company saw it had little impact on decision-making. “What you are is a way for the partner to make money,” he says. “You give them your money, and they take it and do what they want with it; you’re a passenger.  We’re not really great at being passengers because we run a business ourselves.”
What worked better for Ivanhoé Cambridge were its operating businesses. “You’re much more equipped to generate higher returns when you’re running and operating a business,” says Tresham. He estimates that investing in a portfolio of businesses will provide higher returns in the range of several hundred basis points as compared to investing in a portfolio of assets. 
For example, Ancar Ivanhoe, Ivanhoé Cambridge’s joint venture with Brazilian shopping center owner Ancar, has become one of the top five mall investors in the Latin American country. Ancar Ivanhoe, which was formed in 2006 with three properties, has since grown to own 17 malls and manage five additional retail centers. 
By contrast, Tresham views the strategy of buying one mall in one country and another mall in another country as offering an investor no real leverage since it only owns one asset in a particular market. “You’re not an organization,” he says. “You’re a one-off thing.” 
A brief history 
Ivanhoé Cambridge’s roots precede those of La Caisse. The older of its two predecessor companies, Ivanhoe Corporation, was founded in Montréal by grocery chain owner Sam Steinberg in 1952 and opened its first shopping center two years later. The company was known for developing many of the first shopping malls in Québec province throughout the 1950s and 1960s.
The other predecessor company, Cam-bridge, was created in 1960 in Toronto by the Tabachnik and Odette families and opened its first mall in 1962. It went on to become an operator of 42 malls across the country.
Meanwhile, La Caisse was established in 1965 by an Act of Québec’s National Assembly to manage the funds of the Québec Pension Plan and subsequently those of four other pension plans in the Canadian province. It acquired its first office building, the Place Delta complex in Sainte-Foy, in 1980 and created its SITQ real estate subsidiary along with seven other pension plans and insurance companies. 
In 1990, La Caisse acquired Ivanhoe, which began to buy shares of Cambridge in 1998. By August 1999, Ivanhoe was the majority shareholder of Cambridge and, by October 2000, it owned the company outright. In 2011, Ivanhoe Cambridge, SITQ and La Caisse’s in-house real estate group were consolidated into one entity responsible for all of La Caisse’s real estate equity investments, Ivanhoé Cambridge. Following the merger, the company expanded its focus to shopping malls, office buildings and multifamily properties. Today, La Caisse owns 93 percent of Ivanhoé Cambridge, while four other pension plans that own direct interests in the company account for the remainder.
Ivanhoé Cambridge invests according to a five-year strategic plan as well as a business plan that is approved once a year, first by its board and subsequently by La Caisse. Although it reports its progress against that strategic plan to La Caisse on a quarterly basis, the company is free to independently execute on investments that fall within previously approved strategies. Very large transactions and new strategic initiatives, however, must be approved by La Caisse’s senior management and board.
“There are days, of course, when you think that you can be under more scrutiny than you need to be but, to my view, it’s a low price to pay for the capital that you have and especially in an environment where memories are long,” says Tresham. “They say that you remember a good deal for about a week but you remember a bad deal for the rest of your life.”


A pioneering spirit 
Tresham considers La Caisse to be a real estate pioneer. Along with OMERS, which began investing in the asset class in the mid-1970s, the Quebec pension was one of the first Canadian institutional investors in real estate. La Caisse also was an early mover in offshore investing, looking at real estate opportunities in Thailand as early as 20 years ago and investing in China for a decade. “It goes way back to our roots in Québec,” he says. “If you wanted to build a business in Québec, you had to sell yourself outside of Québec.”
Investing outside of its home turf has required Ivanhoé Cambridge to forge multiple partnerships. In fact, as of December 31, more than half of the company’s real estate assets were invested abroad. “I think we’re relatively unique because it started so long ago,” says Tresham. He notes that many institutions make the mistake of being parachute investors. While such groups are flush with capital to deploy, they often lack “an intimate local knowledge” of a market to win deals.
For example, Callahan Capital Partners, with its knowledge of the New York City market, helped enable Ivanhoé Cambridge to buy out The Blackstone Group’s 49.9 percent stake in 1411 Broadway and become the new co-owner of the building, along with existing co-owner The Swig Company. The transfer of ownership has allowed the building’s planned rehabilitation, which had stalled prior to the sale, to proceed.
“When you invest, you need to know the history of every building, what kind of trouble they’re in and where the weak parts are,” says Tresham, whose former employer, Trizec Properties, owned the building prior to being acquired by Blackstone in 2006. “Maybe we can just step in and solve everybody’s problem.”  
The importance of partners 
Despite the importance of partners in its investment strategy, Ivanhoé Cambridge has been culling its base of trusted firms over the past few years. “You can only have so many great relationships in life, and it’s the same in business,” says Tresham. “You can’t have 150 partners as you don’t even have time to do one dinner a year with them. But if you have 30 partners, you can probably talk to them every day, if not every week.” 
Indeed, Ivanhoé Cambridge had 120 partners following the global financial crisis and today has reduced that number to 60, although Tresham notes the pool should be closer to 40. “You want to try to get two things right,” he says. “You want to try to get your partner right first because, even in the worst of conditions, you can still win. But you really want to get the geography and the real estate right, too.”
Arguably, one of the company’s best-known real estate partnerships has been with TPG Real Estate, with which it has built both a warehouse business in Europe and an office platform in California’s Silicon Valley. In the last 18 months, the partnership purchased Woolgate Exchange, a trophy office building in London; acquired companies in the Netherlands and Prague; and taken a publicly-traded company in Silicon Valley private, all of which have earned returns in excess of 20 percent, according to Tresham. 


“Our company is full of asset-level expertise, and they’re full of entity-level expertise,” Tresham says of TPG. “What a beautiful partnership because, over the past three years, we’ve been accessing a lot of great real estate owned by the wrong people.” For example, the logistics and warehouse company in Prague, PointPark Properties (P3), was purchased from Arcapita, a bankrupt alternative investment manager from Bahrain.
“The Ivanhoe Cambridge team – led by Fournier and Tresham – is a fantastic investment partner,” said Kelvin Davis, founder and co-head of TPG Real Estate, in an email to PERE. “They are deeply experienced in multiple markets and product types, don’t shy away from complexity and appreciate the value of true partnerships. We’re fortunate to have the pleasure of working with them.”
Ivanhoé Cambridge and TPG now are in the process of growing P3, and Tresham anticipates that the company could become one of the top five largest European logistics firms within a very short period of time. “If you can be the guy that’s there at the right time, you can get great entities and great people at great prices,” says Tresham. “Probably the most fun that we’ve had in the last three years is those opportunities to just be a little more nimble.”
A global drive 
The acquisition of P3 reflects one of Ivanhoé Cambridge’s major real estate initiatives – to expand into the logistics space, where it currently has very little exposure. “If the world was the US, Europe and Asia, I think we should be looking in all those markets for logistics opportunities,” he says.  
In the US, however, industrial portfolios currently are trading at capitalization rates of 5 percent, which Ivanhoé Cambridge considers to be too expensive. A potential alternative, however, is to build a US logistics business and develop a few assets at a time at higher returns. 
According to Tresham, Asia arguably has the biggest opportunities in the space, but it also has the highest risk, particularly in China. “They’re in a tough period right now, and I am not so sure that this is the day when you back up the truck,” he says.


So, while Ivanhoé Cambridge is actively looking for logistics opportunities in the US and Asia, it is executing on deals in Europe. Since its acquisition by Ivanhoé Cambridge and TPG, P3 has announced eight build-to-suit projects, including ones in Prague; Poznan, Poland; and Bratislava, Slovakia. 
Another growth area for Ivanhoé Cambridge is residential properties, which represented 6.9 percent of its portfolio at the end of 2013. It has built up a large business in London, where it has acquired 11 assets in the past 24 months with local partner Residential Land, and also has pursued a similar strategy with Charleston, South Carolina-based Greystar Real Estate Partners in the US. “We’re just thrilled with the returns,” says Tresham. “We have assets that are worth 50 percent to 60 percent more than what we paid two years ago.”
Meanwhile, in its home country, Ivanhoé Cambridge is in the process of building a few million square feet of outlet shopping centers in towns and cities such as Vancouver, Edmonton, Winnipeg and Niagara-on-the-Lake, Ontario. However, it is aiming to expand its Canadian outlet mall portfolio to four million to five million square feet within the next two years.
Additionally, Ivanhoé Cambridge plans to buy more office and residential real estate in New York this year, even though frothy property pricing in the city would yield lower returns on investments than other US markets, such as Seattle or Chicago. “When you’re building businesses, maybe it allows me to pay a little more for something that I might not otherwise have paid because, on average, I am doing very well and I want the exposure to different assets,” Tresham says. “Maybe we have to do a bit of rotating – rotate out where people are willing to pay super high prices and maybe buy in at high prices – so then you still have a marginal improvement to your situation.”


Becoming a net seller


Despite all of this activity, Ivanhoé Cambridge actually expects to have less money invested in real estate by the end of the year. Interestingly, that contrasts with its parent’s wishes for the company to invest more in property. 


“Their depositors have done very well in the asset class,” says Tresham. “When that happens, you always make your forward investing decisions based on what happened in the past, which is the exact wrong thing to do.”
Indeed, Ivanhoé Cambridge anticipates that it will be a net seller this year, having identified numerous assets in 2010 that no longer were considered long-term holds. Given the heavy demand for real estate, exits of those assets can be expected to be “optimal,” Tresham says.  
For example, Ivanhoé Cambridge has been refocusing its European business on Paris and London, where it is aiming to increase its holdings to achieve critical mass. Meanwhile, the company is selling off its other assets in the region, including a portfolio of 18 hotels in Austria, Belgium, France, Germany, the Netherlands and Spain to Apollo Global Management last month.  Additionally, it has been putting on the market a number of Canadian shopping malls that have been weaker performers and no longer fit in within the company’s retail strategy as it shifts to higher-end properties.
Another key driver of property sales has been pricing. Paraphrasing another industry executive, Clarion Partners’ Steve Furnary, Tresham says, “We hate the pricing this year, but my bet is we’re going to hate it even more next year. And the question is, will you hate it more the following year or is that when opportunities start?”
With pricing at levels where investors currently are earning a 5 percent or 6 percent return, Tresham says institutions need to work harder to source good investments, but they also need to be prepared to walk away. Ivanhoé Cambridge did just that with its 2011 bid to buy Colorado-based apartment real estate investment trust Archstone from Lehman Brothers Holdings, a transaction that it was working on for 18 months. 
“We really, really wanted to buy it with Blackstone,” says Tresham, who had offered to pay nearly $5 billion for Archstone. Eventually, it was sold to Equity Residential and AvalonBay for $6.5 billion one year later. “We couldn’t see that extra value at the end, so we had to back off,” he adds. “But we know the multifamily residential business way better than we knew it before that 18 months, and we know Blackstone way better than we did before that started.”
In the face of such investment changes, Tresham refers to the old adage: ‘If you can’t buy, maybe you should sell’. Indeed, Ivanhoé Cambridge currently owns a number of assets that it has held for only a couple of years but already have reached the values that were targeted at maturity. 
“You hate it sometimes because you bought a great building and you planned on owning it for seven years,” Tresham says.  “Now I’ve got to go find another place for the money, but you can’t let yourself get carried away with that. You have to take your returns when you find them and look for the next opportunity.”  
The official motto of Québec, which can be seen on virtually every car license plate in the province, is ‘Je me souviens’, or ‘I remember’ in French. With its sizable presence in private equity real estate, Ivanhoe Cambridge is poised to make a lasting impression on the industry. 
For the love of funds 
Ivanhoé Cambridge espouses the value of funds, even if it expects to invest less with them 
While many Canadian pension plans have been shifting away from investing in commingled real estate funds, Ivanhoé Cambridge remains a significant backer, with approximately 7.8 percent of its $40 billion real estate portfolio invested in such vehicles. “Just like people believe strongly they shouldn’t invest in funds, we believe strongly that we should,” says Tresham.
Ivanhoé Cambridge invests in funds for three reasons. First, an investor can earn marginally higher returns if it chooses the right funds. Indeed, successful fund investments can generate net returns of 15 percent, several hundred basis points above Ivanhoé Cambridge’s return goal.
Second, some fund managers have expertise in areas that Ivanhoé Cambridge lacks. “If you want to go and buy a collection of nonperforming loans in Europe today, there is a little doubt that there is only two or three people that you would give your money to,” says Tresham. 
Perhaps the most compelling reason to invest in funds, according to Tresham, is the co-investment opportunities. “The beauty of co-invest is that rather than being in a fund, which is totally discretionary, now you have a say,” he says. “We leave a large amount of decision making in those co-invests to the entity that brings us the deal, but we’re more involved and that gives us comfort.  Our belief is it’s an integral part of our business.”
For example, The Blackstone Group has approached Ivanhoé Cambridge with potential co-investment opportunities in Spanish residential debt and US single-family homes, both of which it turned down. However, the company said yes to an investment in Gecina, a Paris-based residential, office and healthcare REIT that it had been tracking for 10 years, investing $1 billion within two weeks.
The other added bonus of co-investments is the learning opportunities for Ivanhoé Cambridge’s staff. “If you want to be a better tennis player, play with a better tennis player than you,” remarks Tresham. “So if you want to get better at real estate, hang out with a better real estate player than you.” His colleagues can learn more spending two days with a firm like Callahan than they might in two months working at home, he notes.
The downside, however, is that fund investments are illiquid. “They can do what they want with your money and, in hard times, pension plans hate that,” says Tresham. Moreover, Ivanhoé Cambridge currently is at the upper limit of its 10 percent to 15 percent range in funds. As a result, he anticipates that the company will decrease its investments in funds over time, as it focuses more on expanding its geography- and property type-focused businesses.
That said, Tresham believes Ivanhoé Cambridge should always support its fund managers. “I really don’t believe you should be cherry picking, either on a temporal basis or on an asset class basis, with fund partners,” he says. “The more you invest in them, the more you get to know them, understand their processes and the way they make decisions in easy times and hard times.”
La Caisse de dépôt et placement du Québec
Headquarters: Montréal
Established: 1965
Chief investment officer: Roland Lescure
Total net assets: C$200.1 billion
Real estate subsidiary: Ivanhoé Cambridge
Real estate assets: C$40 billion
Equity invested in real estate: C$22.57 billion